R&Q spotlights legacy sidecar Gibson Re again, but access to capital critical

R&Q Insurance Holdings Ltd., the specialty player that is planning a return to its original legacy insurance and reinsurance focus by selling its program business unit Accredited, has again spotlighted the importance of its legacy sidecar Gibson Re to the new strategic plan, but noted that access to third-party capital is critical.

We reported back in October that, having announced a sale agreement for its Accredited program management business, R&Q is now set to refocus on its legacy specialism, with its Gibson Re collateralised sidecar vehicle expected to play an even more core role going forwards.

The company then revealed that it is already evaluating opportunities to launch a second collateralised sidecar vehicle, while the fee income earned from its first legacy sidecar Gibson Re rose through the first-half of this year.

This morning, in publishing a circular to shareholders about the planned sale of Accredited and the timing of a shareholder vote, R&Q again reiterated that the Gibson Re sidecar is critical to its future plans as a legacy only business.

The whole plan hinges on a shift to a fee income driven, capital light, legacy insurance and reinsurance model, with the Gibson Re sidecar and future iterations of it taking the majority of the risk, so enabling R&Q to lean heavily on third-party investor appetite for returns from reinsurance risks.

The company said this morning, “Gibson Re, R&Q’s dedicated sidecar will continue to be a core component of this transition. R&Q retains 20 per cent. of a typical legacy transaction with the remaining 80 per cent. ceded to Gibson Re. Gibson Re will underpin R&Q’s ability to deploy capital and offer innovative legacy solutions to its clients.”

There is also fee income to come from the deal that R&Q entered into with alternative investment manager Obra Capital, Inc., in which they acquired a wholly owned subsidiary of global safety equipment manufacturer, MSA Safety Incorporated to manage its non-insurance legacy liabilities.

R&Q continues to state that, this deal, alongside Gibson Re, are key to its future.

But, with Gibson Re, it is all about access to capital and whether investors are willing to capitalise a second vintage of the legacy sidecar for R&Q.

Importantly, the present sidecar agreement with Gibson Re closes to new deals in September 2024, R&Q explained.

Adding that, “Management have assumed and is planning for a second vehicle on broadly similar terms, however this coverage is not guaranteed.”

Stating that, “There is a risk that R&Q Legacy is unable to access the third-party capital required to support its transition to a fee-based business model thus impacting its ability to sustain growth.”

R&Q further explained, “As R&Q Legacy transitions to a fee-based business model, it requires the ability to raise additional third-party capital and liquidity to fund the formation and launching of reinsurance vehicles that allow R&Q Legacy to support a capital-light legacy underwriting business, reduce its retained risk and generate recurring management fees. If third-party capital becomes either unavailable or economically less attractive, the viability of such vehicles and therefore of R&Q Legacy’s strategy to transition to a fee-based business model may be significantly impacted.”

If the Gibson Re sidecar delivers its returns as forecast for this first iteration, that is one hurdle with gaining investor support for a second sidecar overcome.

But, perhaps more importantly at this stage, it is the investor perspective on R&Q as a going-concern, after the sale of Accredited, that will matter the most.

On this, the company said, “Third-party investors may be less willing to co-invest in these vehicles if their views on R&Q Legacy become negative as a result of poor financial or operational performance, negative reputational impacts, or any other events that may negatively impact their perception of R&Q Legacy as a co-investor.”

Which shows just how important the sidecar strategy and third-party investor appetite is going to be to R&Q going forwards, meaning its future is to a degree going to be dictated by its ability to raise this second legacy sidecar, which is going to be the most critical for the company.

As well, of course, as completing a sale of Accredited and dealing with its debt overhang.